Fractional reserve banking for beginners (2)

Maybe it's easier to explain this with balance sheets.

On Day 1, I set up Wadsworth Bank Limited with £50 of my own money, which I stick into the cash-box in coins and notes. On Day 2, WBL lends the money to Mr A who toddles off and buys a house worth rather more than £50 (that house being WBL's security).
By Day 3, I notice that other banks are taking deposits, which enables them to lend out far more than WBL can. I assume that a Tier One Capital Ratio of one-eighth is a sensible figure, and can thus lend Mr B £400 to buy Mr A's house. WBL's balance sheet duly records an asset of £400 (what Mr B has to pay back to WBL), and a liability of £350 (money that Mr A can withdraw at any time, being his sale proceeds of £400 less the £50 that he owed WBL from Day 2).
This is all rather splendid, as Mr B is paying WBL 7% interest (£28 per annum) and WBL is only paying Mr A 6% interest (£21 per annum) so WBL is making a handsome gross profit of £7, or 14% return on the £50 I originally invested.

On Day 4, I take most of the afternoon off to enjoy a splendid lunch at my Club. On my return I am horrified to see that my fresh-faced young mortgage salesman has been rather too enthusiastic in granting new loans. He has financed the sale of Mr D's house to Mr C for £400. WBL's balance sheet looks like this:
"But look, Sir" he enthuses "We can earn £56 a year interest on our loans to Messrs B and C, but we only have to pay £45 interest to Messrs A and D, so our gross profit will rocket to £11 a year, a 22% return on capital!".  I explain the Basel capital requirements to the young fellow and he is briefly crestfallen. "Ah, but Sir" he suggests after a few minutes head-scratching "We could lend the bank's good name to a completely independent company incorporated in the Channel Islands, transfer Mr C's loan to it and invite Mr D to withdraw his deposit and use it instead to finance that company. We could even offer him a slightly higher interest rate of 6.5% to compensate him for the higher risk".

After discussing the matter, Mr D agrees and by Day 5, WBL's balance sheet is again showing a healthy Tier One Capital ratio of one-eighth.
Wadsworth Bank (Jersey) Limited is not licensed as a deposit taker in the UK, and so has no need to comply with such petty requirements.
As WBJL is a totally independent company, WBL is not required to include its figures in its own balance sheet, and because Mr C is paying 7% interest and WBJL is only paying 6.5% interest to Mr D, WBJL is generating a further £2 gross profit each year out of thin air, which my mortgage salesman and I share as an annual bonus. Splendid!

Unfortunately, Mr D's solicitors insisted that under the terms of his loan to WBJL, WBL (as sponsor) have to guarantee any shortfall should Mr C be unable to meet his commitments, or should Mr C's house turn out to be worth less than the £400 purchase price ...